The Island Futures Exchange, LLC ("Island") appreciates the opportunity to comment on SR-NFA-2002-02 ("Proposal") in which National Futures Association ("NFA") proposes several interpretative notices for its members who are registered as broker-dealers in security futures products. Island commends NFA and the Commission for crafting the proposed interpretative notice with an appropriate level of flexibility given its applicability to a new product with unpredictable trading characteristics and uncertain market structure. Island generally supports the interpretative notice regarding registration requirements and fair commissions, however, we have some concerns about specific requirements contained in the interpretative notice regarding best execution obligations.

Interpretative Notice to NFA Compliance Rule 2-4 Regarding Best Execution Obligations ("Best Execution Notice") is premised upon NASD Rule 2320. Island's specific concern with the Best Execution Notice relates to reference to "channeling an order through a third party" and member's affirmative obligation "to show" the economics related to use of a third party. This specific language is language that dates to an earlier time when orders were telephonically delivered through a variety of broker-dealer channels to their final destination.1 Despite radical changes to the securities markets, this language contained in NASD 2320 has remained unchanged. Island is concerned that this language is too broad in its application (e.g., any "third party") and is somewhat contradictory to the "factors test" and traditional agency common law.

As a result of new technologies, the majority of orders in both the securities and derivatives markets are currently delivered through electronic means directly to a marketplace. Market participants rely on a multitude of third parties, including ISVs, telecommunications providers, service bureaus, network providers, etc. As currently drafted, Compliance Rule 2-4, would establish an affirmative obligation on a member "to show" the member's cost-benefit analysis related to its decision to route an order through such a third party. First, the language is unclear to whom the member is obligated to show such analysis (e.g., the customer or the NFA). Second, an analysis of costs must be included in the member's "factors test", however, there is no obligation "to show" such analysis. A member's decision to use a third party would likely include an analysis related to "pressure on available communications" or "fees and costs". Also, the reference to "third party" is much too broad, in today's trading environment where market participants rely upon third parties such a telecommunication providers, network providers and technology providers for routing purposes. It is unlikely that the NASD contemplated orders being electronically routed through non-broker-dealer third parties when adopting the language contained in NASD Rule 2320 in 1968. Moreover, by including such language, it opens an opportunity for plaintiff's counsel to fish for information to form a false basis for a best execution complaint. Therefore, Island proposes that NFA add to the factors outlined in the Best Execution Notice another factor on the use of "third party broker-dealers" and eliminate the reference to "channeling an order through a third party."

Island urges the Commission to approve the Proposal, provided that the Best Execution Notice is revised to include "the use of third party broker-dealers" in the factors test rather than under an affirmative obligation to show the member's analysis. Island thanks the Commission for its consideration.

NASD Rule 2320 "Best Execution and Interpositioning" was adopted May 1, 1968. During that era, there were a variety of enforcement proceeding to curb abuses related to brokers' use of other broker-dealers for routing orders on the primary markets (e.g., reciprocal order routing arrangements).